Federal Reserve decides to hold rates steady

Written by Reuters | Washington | Updated: Jan 30 2010, 03:22am hrs
The Federal Reserve on Wednesday offered a guardedly upbeat view of the US economy and renewed its pledge to keep interest rates near zero despite the objection of one policy maker.

The decision to hold rates steady by the Feds policy-setting Open Market Committee (FOMC) was 9-1, with Kansas City Federal Reserve Bank President Thomas Hoenig dissenting because he wanted the central bank to eliminate a phrase vowing to keep rates exceptionally low for an extended period.

The FOMC statement reflected a somewhat brighter tone than previously and appeared to put more faith in the sustainability of a nascent economic rebound.

Economic activity has continued to strengthen, the panel said after a two-day meeting, a slight upgrade from a December statement that said activity had continued to pick up.

It also described the pace of economic recovery as likely to be moderate for a time, having previously depicted the recovery as likely to remain weak.

This is as close an admission that we are likely to see that the FOMC thinks the economy is on a self-sustaining recovery path, said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi.

Tempering its optimism, the Fed removed a reference to an improving housing market after the latest batch of figures revealed a new round of weakness in the sector. Still, the Fed said it will allow its $1.43 trillion programme of mortgage linked-debt purchases to expire as planned at the end of March.

The US dollar extended gains after the Feds decision, pushing the euro below $1.40 for the first time since July as investors interpreted Hoenigs dissent as bringing the central bank one step closer to tightening monetary policy. Stocks initially moved lower but then recovered to end higher, while Treasury bond prices dipped.

In what appeared to be a nod to its hawkish members, the Fed sounded less certain about the prospects for low inflation. Rather than saying price growth will remain subdued, it said simply that it is likely to do so.

In a poll, nine of 15 respondents said they expect the Fed to start raising rates this year and 13 dealers said they expect the Fed to stick to its plans to end purchases of mortgage-backed securities by March.

In an effort to stem the worst financial crisis in generations and combat a deep recession, the US central bank not only slashed interest rates but undertook a series of emergency actions to soothe ailing credit markets.